Eligibility not protected--cite?

[BG5150]

I always thought that eligibility is not a protected benefit.  For example, a plan has a 3-months of service requirement and month entry dates.  Rhoda was hired on February 15 and would enter the plan on 6/1. 

However, in September that year, the ER amends the plan to require 1 YOS with semi-annual entry dates, and does not specifically exempt those already in the plan.

So, to me, Rhoda is no longer an eligible and active participant in the plan until 7/1 the next year.

Can someone point me to some guidance on why this is; ie, that eligibility is not a protected benefit...

EOB or the code would be cool.  I can't find it in Sal's book, but I'm sure it's in there somewhere...

[Lou S.]

Which protected benefit under 1.411(d)-4 would it fall under?

https://www.law.cornell.edu/cfr/text/26/1.411(d)-4

Not definitive but see the final slide of this 2016 ASPPA conference presentation

https://www.asppa-net.org/Portals/2/PDFs/2016AnnualHandouts/WS29.pdf

[Bill Presson]

So you're saying she already entered the plan on 6/1 and then three months later the eligibility requirements are changed?

Now, I know you can change a category of eligibility that would impact a participant, like excluding a division prospectively. But I"m pretty sure you can't change the eligibility for someone already in the plan.

I'll see if i can find something on that.

[Lou S.]

Our IRS approved document has this language in the Adoption Agreement. If Eligibility was a protected Benefit I'm not sure why it would be needed.

Amendment or restatement to change eligibility requirements
q. [ ] This amendment or restatement (or a prior amendment and restatement) modified the eligibility requirements and the prior eligibility conditions continue to apply to the Eligible Employees specified below. If this option is NOT selected, then all Eligible Employees must satisfy the eligibility conditions set forth above.
1. [ ] The eligibility conditions above only apply to Eligible Employees who were not Participants as of the effective date of the modification.
2. [ ] The eligibility conditions above only apply to individuals who were hired on or after the effective date of the modification.

 

[RatherBeGolfing]

@BG5150 We discussed this here after the 2016 ASPPA Annual where when Brians presentation on 411d6 caused a bit of a stir.

You do not have a cutback issue If someone who is currently eligible becomes ineligible because of a change in eligibility requirements.  You may have discrimination issues if your amendment favors HCEs, but you don't have to protect someones status as eligible if the change is otherwise permissible.

I don't have time to look it up at the moment but this was my citation in the EOB in last years thread

Quote

From the 2017 EOB (Ch 2, Section VI, Part E)

  Quote

Just because an employee qualifies as a participant in the plan does not guarantee the employee the right to participate in the plan for the rest of his employment with the employer... The anti-cutback rule under IRC §411(d)(6) only protects the employee's benefits that are already accrued. It does not guarantee the right to accrue additional benefits in the future... The right to continue to participate in a plan is not a protected benefit. Accordingly, an employee's status as an active participant in the plan can be eliminated by modifying the eligibility requirements in a way that the employee is no longer satisfying the requirements for participation. When active participant status is eliminated, the participant's accrued benefit is protected, but the employee will not accrue additional benefits until he or she first re-establishes the right to participate in the plan under the modified eligibility requirements.

 

 

[shERPA]

Right, eligibility is not protected.  Accrued benefits are protected. 

[BG5150]

Thanks, RBG!  Just what I was looking for.

[Bill Presson]

17 hours ago, shERPA said:

Right, eligibility is not protected.  Accrued benefits are protected. 

So, let's discuss for a moment. Assuming all the dates for the OP are 2017. Rhoda is hired on Feb 15 and enters the plan on 6/1, then the eligibility is changed in September 2017 to requirements that she does not meet.

Now to discuss things that aren't presented by the OP.

1. Let's assume it's a safe harbor non elective plan (and ignoring all the safe harbor amendment requirements for the moment). Would she get a 2017 contribution? I would say yes.

2. Let's assume it's a regular 401(k) and she starts deferring on 6/1. She's a participant at that point but in September would move to an ineligible category, correct? But she's still a participant for the 5500 count.

3. Let's assume it's a regular 401(k) and she doesn't start deferring on 6/1. She's initially a participant, but in September would move to an ineligible category and then WOULDN'T be a participant for the 5500 count, correct?

[RatherBeGolfing]

1 hour ago, Bill Presson said:

1. Let's assume it's a safe harbor non elective plan (and ignoring all the safe harbor amendment requirements for the moment). Would she get a 2017 contribution? I would say yes.

Yes.  She would get a 2017 SH contribution.  I guess the amount would depend on whether the plan uses participation comp or full year comp.

 

1 hour ago, Bill Presson said:

2. Let's assume it's a regular 401(k) and she starts deferring on 6/1. She's a participant at that point but in September would move to an ineligible category, correct? But she's still a participant for the 5500 count.

Yes. For 5500 purposes she is a participant at the end of the year because she has a balance. However, she is not an active participant for 5500 purposes since she is now ineligible.

 

1 hour ago, Bill Presson said:

3. Let's assume it's a regular 401(k) and she doesn't start deferring on 6/1. She's initially a participant, but in September would move to an ineligible category and then WOULDN'T be a participant for the 5500 count, correct?

Yes.  She is an ineligible participant with no balance at the end of the year.  She is not a participant for 5500 purposes.

[CJ Allen]

There seems to be 2 issues here, eligibility and participation.  When the employee was hired  February 15, they met eligibility May 15, and became a qualified "participant" on June 1.  If, subsequent to June 1, the "eligibility" parameters are changed, it would not retroactively affect a "participant" in the plan.  It would effect ineligible employees and eligible employees who have not attained "participation" date in the plan.  A change to discontinue participation would be something to the effect of not covering XYZ company in the plan any longer, discontinued coverage of union employees, or other changes in participation -- but, not necessarily changing eligibility to be more restrictive to non-participants.

[Mike Preston]

1 hour ago, CJ Allen said:

There seems to be 2 issues here, eligibility and participation.  When the employee was hired  February 15, they met eligibility May 15, and became a qualified "participant" on June 1.  If, subsequent to June 1, the "eligibility" parameters are changed, it would not retroactively affect a "participant" in the plan.  It would effect ineligible employees and eligible employees who have not attained "participation" date in the plan.  A change to discontinue participation would be something to the effect of not covering XYZ company in the plan any longer, discontinued coverage of union employees, or other changes in participation -- but, not necessarily changing eligibility to be more restrictive to non-participants.

I think you are off base to make the blanket statements you are making above.  It totally depends on the actual language and there is nothing abnormal about the language applying to prospectively affect a participant.

[RatherBeGolfing]

2 hours ago, CJ Allen said:

There seems to be 2 issues here, eligibility and participation.  When the employee was hired  February 15, they met eligibility May 15, and became a qualified "participant" on June 1.  If, subsequent to June 1, the "eligibility" parameters are changed, it would not retroactively affect a "participant" in the plan.  It would effect ineligible employees and eligible employees who have not attained "participation" date in the plan.  A change to discontinue participation would be something to the effect of not covering XYZ company in the plan any longer, discontinued coverage of union employees, or other changes in participation -- but, not necessarily changing eligibility to be more restrictive to non-participants.

You are wrong, plain and simple. This is why amendments have to be drafted very carefully in order to avoid unintended consequences.

[CJ Allen]

I stand corrected and must admit to being too vague.  While it is permissible to totally remove participation to the later of the new eligibility requirements and new entry dates, I've not experienced any plans making such an election to the extent they didn't grandfather employees who were already participants in the plan.